7 Cryptos to Watch as Blockchain Takes Place
Some of the best cryptos to watch suffered catastrophic losses this year, raising questions about their viability. Of course, many if not most of the blockchain market’s ardent supporters believe that valuations can rise again. However, it is important for virtual currency traders to have an objective view.
Fundamentally, the biggest challenge cryptos face is arguably the Federal Reserve. When the coronavirus pandemic first upended the global economy, the Fed expanded its balance sheet. In other words, it bought back bonds, which in turn introduced mass liquidity into the monetary system. Cynically, it is useful for cryptos due to inflationary pressures. Now the central bank is trying to shrink the balance sheet. Such measures will reduce liquidity in the system, increase the purchasing power of the dollar together with raising reference interest rates. Therefore, boring government bonds and even sitting on cash present relatively low-risk bets with significant returns. This dynamic is in stark contrast to cryptos which are constantly eroding.
Unfortunately, until this narrative reverses itself, it’s hard to see how cryptos can recover so quickly from their illness. Still, anything can happen. It is therefore important to consider all sides when navigating the digital asset market.
Bitcoin (BTC-USD)
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The reference for all cryptos, Bitcoin (BTC-USD) is gaining significant attention because wherever BTC goes, so does the rest of the virtual currency complex. Therefore, the current circumstance does not provide much encouragement for investors. On a year-over-year basis, Bitcoin fell more than 59%. And since the beginning of July, BTC is sitting at parity.
Fundamentally, it is hard to imagine that Bitcoin will remain static and bounded indefinitely. Generally, cryptos have some directional bias. Therefore, investors may need to think about how they want to approach BTC and other important assets. Interestingly, some technical analysts weighed in on Bitcoin’s price action, noting that it could be months before we see a major expansionary move in the space. However, investors would do well to exercise restraint regarding technical patterns and other “voodoo” chart magic, regardless of implications.
It’s not that I don’t believe in the value of technical analysis. But with the Fed introducing a massive paradigm shift in risk-on asset classes, it’s best to take a cautious approach.
Ethereum (ETH-USD)
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Ethereum (ETH-USD) recently underwent a consensus protocol change, moving from proof of work (PoW) to proof of stake (PoS). Interestingly, Cointelegraph.com noted that many traders expected a price increase in ETH because the underlying network became deflationary. In other words, fewer ETH units existed to chase more goods.
However, Ethereum remains a disappointing investment in 2022. Since the beginning of the year, ETH has fallen 64%. Since The Merge event, the coin fell by about 8% of its market value. Here, Cointelegraph.com provides a critical lesson.
“While the mechanism introduced by the merger and the current state of deflation is technically supposed to drive prices up, the timing is simply not appropriate. The prices of any cryptocurrency are not only based on the supply and burn mechanism – liquidation also plays a significant role.”
Going forward, investors need to recognize that pure risky assets like cryptos depend on the theory of bigger fools. If you don’t think anyone else will buy coins or tokens from you at a higher price, that narrative should be your guide, not some magical blockchain jargon.
Tether (USDT-USD)
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Increasingly, I have expressed concerns about stablecoins such as Tether (USDT-USD) due to the possibility of catastrophic risk. While I don’t think Tether will outright collapse, we don’t really know if USDT enjoys full paper support. Therefore, under the current deflationary ecosystem in crypto, it is better to be safe than sorry.
In other words, consider converting at least some of your Tether back to US dollars. The Fed actually encourages you to make this move.
According to data from Google Finance, USDT has lost about 0.03% of its value since the beginning of the year. It’s not much, I understand that. But here’s the point. When the Fed shrinks the size of its balance sheet, that aggressive action could create a liquidity crisis. Put differently, your fiat dollars will likely be worth more than your crypto dollars. Granted, you can always earn interest on your stablecoins via decentralized finance (DeFi) platforms. However, Tether has total collapse risk. On the other hand, the dollar probably isn’t going anywhere despite what your favorite doom-and-goom YouTuber has to say.
XRP (XRP-USD)
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While crypto always had unpredictable risk-reward projections, XRP (XRP-USD) can be completely separated from all contexts. Whether you want to look at Fed policy or the price of gold or stock market valuations, none of these metrics represent the ultimate arbiter of XRP. Instead, the US Securities and Exchange Commission will probably have the final say.
If you have been following cryptos for the past few years, you will know that the US SEC charged Ripple Labs (the founding entity of XRP) of overlapping securities laws with its XRP distributions. Of course, Ripple denies wrongdoing, claiming that XRP really represents a virtual currency. Depending on the outcome of this lawsuit, XRP could either skyrocket or crater.
According to blockchain news resource Beincrypto.com, the legal battle will soon reach its conclusion. Honestly, I have some concerns. Should Ripple lose, the development could bode poorly for crypto. But even if Ripple emerges victorious, there is a possibility that the news, like Ethereum’s The Merge, will not move XRP. Keep this in mind before betting too much on XRP.
Dogecoin (DOGE-USD)
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Although terribly volatile and risky even by virtual currency standards, Dogecoin (DOGE USD) represents an exciting angle among cryptos. Generally speaking, DOGE focuses on building community and making money through speculation. Although it may sound crude, I don’t think there’s anything wrong with this ethos. If anything, it forewarns people about the Greater Fool theory.
Unlike many other blockchain projects, Dogecoin members are not obsessed with grandiose ambitions such as addressing world hunger. Nor does the broader DOGE community virtue signal to promote microtransactions and social justice in a faraway land. No, DOGE focuses on having fun and maybe making a little scratch while you’re at it. Nothing more, nothing less.
Such decentralization from the core motives underlying other cryptos could allow Dogecoin to differentiate itself from leaders like Bitcoin or Ethereum. That would be helpful given that the Fed’s monetary policy disincentivizes both assets. Nevertheless, it is an extremely risky hypothesis, so caution is warranted.
Aave (AAVE-USD)
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While most cryptos posted disappointing results in the charts in the past week, Aave (AAVE-USD) moved against the grain, returning stakeholders 5.4%. Admittedly, it’s not the most robust performance ever. However, over the past three months, AAVE has increased almost 3%. This small but significant upside action suggests that AAVE may continue to trend toward the sector’s dominant bearishness.
Basically, Aave brings an exciting framework to the table. According to crypto wallet service Kraken, Aave is a DeFi platform. Specifically, it’s a “decentralized lending system that allows users to lend, borrow and earn interest on crypto-assets, all without intermediaries.” Most importantly, “Aave users don’t need to trust a particular institution or person to manage their money. They just need to trust that the code will execute as written.”
To be sure, the higher returns stemming from DeFi platforms tempt onlookers. However, investors must also realize that US bonds, or even sitting on cash, present opportunities for wealth expansion with lower risk. Therefore, you should engage AAVE and all other cryptos with this framework in mind.
Polygon (MATIC-USD)
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Another name among cryptos that delivered a positive result in the last week, Polygon (MATIC USD) increased by just under 2%. Under any other circumstances, such a return would not attract much attention. But with most digital assets suffering massive double-digit losses so far this year, any hint of sustained upside makes a case for further investigation.
Per Coinmarketcap.com, Polygon is “the first well-structured, user-friendly platform for Ethereum scaling and infrastructure development. Its core component is the Polygon SDK, a modular, flexible framework that supports building multiple types of applications.”
Recently, Polygon grabbed some headlines in the crypto space when Now Holdings (SNEEZE:NOW) (a financial institution such as Warren Buffett’s Berkshire Hathaway (SNEEZE:BRK-B) backs) confirmed that they chose Polygon’s “Supernets” technology for their blockchain and digital token, known as Nucoin.
While the mention of Warren Buffett makes for an interesting story, investors should exercise due diligence. Remember, the Ethereum merger was also supposed to be groundbreaking, but it ultimately didn’t do much for ETH.
As of publication date, Josh Enomoto had a LONG position in BTC, ETH, USDT, XRP and DOGE. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Guidelines for publication.
